In the past month, the Reserve Bank of India’s (RBI) intervention in the foreign exchange market to protect the rupee from going into a free fall is being seen by experts as an attempt to manage excess volatility spurred by speculative action instead of being target-based.
After a whopping 5% drop in 2025, the first week of the current year has seen the rupee fall by another 0.17%. However, the rupee has been more range bound rather than hitting new closing lows on a daily basis, as it happened earlier.
On Thursday, the rupee remained volatile, swinging widely in intraday trade before ending weak against the dollar. The domestic currency opened weak at 89.96, down from its previous close of 89.89, but recovered to an intraday high of 89.74, gaining nearly 15 paise after the RBI intervened. However, there was another wave of outflows leading to the rupee closing at 90.03, down 14 paise or 0.16%.
Sakshi Gupta, principal economist at HDFC Bank, said that RBI’s intervention strategy has long involved curbing excess volatility and acting when intervention is most effective, often by taking markets by surprise.
“RBI’s intervention must also be viewed in the context of managing expectations and confidence and to prevent a run in terms of capital flows or the rupee—basically acting to signal stability in a highly uncertain global environment,” Gupta said.
Agreed Kunal Sodhani, head – treasury at Shinhan Bank, said, “I don’t see any aggressive RBI intervention right now. The moves in the last few days look more like natural price action in the first week of a new year, when even small flows can shift the rupee.”
He added that the recent appreciation has come on low volumes, with no major rupee-specific or global triggers, and exporters have returned to hedging as forward premia have risen. “Overall, the rupee is simply moving within its natural range,” he said.
However, forward premia have climbed sharply from around 2.10% to nearly 2.70%, bringing exporters back to sell dollars, while importers remain largely inactive after having seen levels close to 91.
Decoding the REER Signal
This combination has created mild upside pressure without distorting demand–supply dynamics, traders said. Meanwhile, the real effective exchange rate (REER) stood at 97.51 in November 2025, compared with 108.03 in November 2024, signalling that the currency remains undervalued. The REER measures the rupee against a basket of 40 currencies, adjusted for inflation.
Added Tanay Dalal, senior vice president – business and economic research at Axis Bank, “The RBI is essentially managing an optimisation challenge. It aims to guide the rupee towards a market‑determined fair value while avoiding the kind of overshooting that a completely hands‑off approach can trigger, as seen in episodes like 2011, 2013, and 2018. At the same time, it seeks to limit excessive depletion of FX reserves.”
Role of the $10 Billion FX Swap
Market participants also pointed to the FX swap scheduled for January 13, raising expectations of increased RBI presence in the spot market thereafter. While swaps typically enhance the central bank’s dollar liquidity and provide greater operational flexibility to intervene if needed, traders cautioned that any action would remain contingent on market conditions rather than follow a preset pattern. RBI will conduct a USD/INR swap of $10 billion with a three-year tenor.
In a recent report, Goldman Sachs said that much of the rupee’s underperformance is likely behind it, citing India’s favourable external balance and a contained current account deficit of about 1% of GDP amid benign oil prices. The bank forecast USD/INR at 89.5, 91 and 91 over the next three, six and twelve months, respectively, while cautioning that delays in a US–India trade deal could weigh on the balance of payments.
In the near term, Sodhani expects the rupee to remain range-bound between 89.61 and 90.35, warning that only a decisive break below 89.61 would signal a shift to a lower range. However, adverse tariff-related developments remain a risk.
Anindya Banerjee, head of currency and commodity research at Kotak Securities, said, “If the United States does impose additional tariffs on India, then the rupee could depreciate towards the 92-mark.” “The central bank is playing this well—using the currency as a buffer to support exporters amid the trade war. Until a trade deal is signed, I don’t expect the RBI to alter its approach,” Banerjee added.
On foreign inflows, economists said prospects hinge on trade deal announcements, stronger domestic growth signals, policy measures to attract capital, global liquidity conditions and broader shifts in global savings trends.